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Another office tower said needed for downtown

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The owner of six downtown San Diego's office towers says there is need for at least one more major office building in the core, and that his firm would be interested in filling the bill.

Charles Black, senior vice president of the San Diego region for The Irvine Co., said with the already completed Broadway 655 and the under construction DiamondView Tower filling up, one or more major office buildings need to be planned in the heart of downtown to ensure a balanced market.

"When I look at the community plan, I want to see this happen in the (financial) core," he said at a meeting of the Downtown San Diego Partnership at the Marriott Gaslamp last week.

Black added that his firm would be willing and able to develop such a project in downtown San Diego as it has throughout Southern California.

When asked if there is even room in the core, Black said there are still blocks where office towers could be constructed.

Not too far away, Westfield Corp. is exploring the possibility of developing perhaps a 300,000-square-foot office building at Horton Plaza where the Planet Hollywood was and the Sam Goody store is now.

Black said the proposed Ballpark Village adjacent to Petco Park in the East Village also offers some intriguing possibilities for new office development.

When asked if the fact that many tenants are simply moving from one place to another within downtown is reason not to put up a new building, Black said tenant movement is a poor indicator.

"Every time a Class A building goes up, there's going to be some shifting around," Black said, before adding that in a tight market, the number of these moves will remain minimal.

Black said about 22,000 jobs were added in the county last year, and about 60 percent of them were high-wage employment. These kinds of numbers give The Irvine Co, plenty of confidence about the market. "We're bullish on the future," he said.

But how easy is it to get a company to relocate downtown?

Stath Karras, president and CEO of Burnham Real Estate, suggests that to lure tenants downtown is a multi-pronged strategy, made all the more difficult by the trend of many companies to pack more employees in smaller spaces.

"The challenge is the employee base doesn't live anywhere near downtown ..." Karras said. "We're not seeing big companies coming to San Diego. Mostly it's natural growth."

Whether by existing or new tenants, buildings are filling up so that even with the 389,000-square-foot Broadway 655 on board, the downtown office market has still managed to stay in the low double digits. The overall office vacancy for downtown was 10.4 as of the end of the first quarter. This compared to 8.3 percent for the county overall, according to a Burnham Real Estate office report.

After a slow start, Lankford & Associates' Broadway 655 was completed last fall and is currently about 60 percent leased with enough leases out for signature to bring the building occupancy to about 75 percent. Major tenants include the law firms of Lerach, Coughlin, Stoia, Rudman & Robbins LLP, and Peterson & Price.

Lankford's Ed Muna noted that rather than simply moving around, many downtown tenants are moving from place to place because they are outgrowing their spaces.

Muna said that while rates in downtown have been going up, $3 per square foot is still significantly better than the $4 rate charged in such suburban markets as Del Mar Heights and the University Towne Centre area north of downtown San Diego.

Jason Wood of Cisterra Partners said the 236,000-square-foot office portion of the DiamondView Tower is about 35 percent pre-leased.

In the suburban north area of the city, with those $4 per square foot office lease rates and a 5.3 percent vacancy rate (it was more than quadruple that figure about four years ago), Del Mar Heights is now very much a landlord's market.

The vacancy is likely to go up at least a bit in Del Mar Heights as 701,520 square feet is under construction, according to the Burnham office report, of which about 240,000 square feet is in a project known as Paseo del Mar.

Like Del Mar Heights, the University Towne Centre market in north University City was once considered overbuilt. Now, with a vacancy of 9.5 percent as of the end of the first quarter, versus 11.9 percent for the same quarter a year ago, the market is in balance.

While this market continues to tighten for the time being, the vacancy may rise when the 350,000- to 400,000-square-foot La Jolla Commons development comes on line in about two years.

The Sorrento Mesa market, also considered overbuilt as recently as a year ago, is another one of those areas that has experienced a strong turn-around. The vacancy has declined from 18 percent in the first quarter of 2005, to 10.8 percent in the first quarter of 2006.

"Qualcomm has been a driving force in the area's recovery with a number of large lease transactions fueling nearly 1 million square feet of new, high-profile build to suit office buildings," the Burnham office report noted.

While pre-leasing has been strong along the state Route 56 Corridor with companies such as Intuit (Nasdaq INTU) leasing hundreds of thousands of square feet of space, the Interstate 15 corridor has been slower to lease up.

Burnham writes that Poway in particular has seen the construction of hundreds of thousands of square feet of office space recently, leading to an inventory of more than 1.1 million square feet.

"As a result, vacancy is very high at 63.4 percent (leasable space minus owner users) as it waits for this new space to absorb," according to the Burnham report.

With a 6.6 percent vacancy, Kearny Mesa has no such problem, and construction has begun on the eventual 1 million-square-foot Sunroad Centrum development in the San Diego Spectrum master plan on the old General Dynamics property. The 300,000-square-foot first phase is slated for completion in June of next year.

In Carlsbad, something on the order of 4 million square feet of office and industrial development is in the long-range pipeline, and many of these buildings are being taken by users often well before they are started.

For now, Carlsbad boasts an 8.1 percent vacancy, rising rents and low concessions.

Finally, investors continue to look for new office buildings to acquire. This isn't only happening downtown as evidenced by this past quarter's sale of the 440,000-square-foot Pacific Center in Mission Valley to Maguire Properties for $149 million or $344 per square foot -- indicating that trophy properties in Mission Valley are garnering interest as they are downtown.

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